TECHNOLOGY LICENSING TODAY Highlights of Technology Licensing Course

TECHNOLOGY LICENSING TODAY (Highlights of Technology Licensing Course) Karl F. Jorda David Rines Professor of Intellectual Property Law & Industrial Innovation Director, Kenneth J. Germeshausen Center for the Law of Innovation & Entrepreneurship Franklin Pierce Law Center Two White Street, Concord, NH 03301 USA Seminar Siam Cement Group Bangkok, Thailand December 19 -20, 2006

PATENT SYSTEM INCENTIVES 1) To invent 2) To disclose inventions 3) To “invent around” prior inventions — improvements 4) To invest in innovation — a) the most important incentive of all (CAFC Judge Giles Rich) b) ratio of requisite investment in the 3 phases of innovation from lab to market, i. e. research, development and commercialization is 1: 1000. (This supports thesis of investment incentive. )

TENETS AND TRUISMS on Intellectual Property Rights and Technology Transfer • Technology transfers, licensing and investments are ever so much easier to carry out and accomplish via patents and other IPRs as vehicles or bases. • Importation of technology leads not only to export of products but also to export of adapted, improved technology (reverse technology transfer). • The days when technology transferors took advantage of transferees (in developing countries) are gone, the realization having taken hold that the only viable license is one that results from a win/win approach and passes the fairness test.

REASONS FOR LICENSING 1) 2) 3) 4) 5) Unblock interlocking IPR’s Settle IP litigation, interference Grow and diversify the business Deal with outside idea submission Convert dormant IP portfolios into profits

HOW TO FACE THIRD-PARTY PATENTS Starting point and first step in managing downside risk: company policy is not to infringe valid patents of others 1. Determine scope — if outside, no problem Caveat: positive doctrine of equivalents (even if inside there may be no problem by dint of negative doctrine of equivalents) 2. Determine validity — invalid patent cannot be infringed 3. Work around it, design around it, invent around it 4. Wait till expiration, if not too far off 5. Take a license or buy patent or whole business N. B. Different kinds of patents have different scope of protection • Paper patent • Commercially-used-patent • Basic or pioneer patent

KINDS OF LICENSES I. Patent License Trademark License Know-How License Trade Secret License Copyright License Software License Hybrid License Franchise II. Exclusive License Non-Exclusive License Sole (semi-exclusive) License III. Royalty-bearing License Royalty-free License IV. U. S. (domestic) License (Specific country) License World-wide License

KINDS OF LICENSES (cont. ) V. Sublicense Cross-License Package License Label License Shrinkwrap License Grantback License Grant-forward License VI. Implied License Compulsory License VII. Shopright Option Agreement Secrecy Agreement Consultation Agreements Technical Assistance Agreement Invention Agreement Employment Agreement Releases, Waivers VIII. Assignments

DEVELOPMENTS AND TRENDS IN LICENSING/TECHNOLOGY TRANSFER • Companies that didn’t used to license at all, now do it (CIBA-GEIGY, Du. Pont, IBM, Westinghouse) • Royalties are going through the roof • Option Agreements are on the increase • Other quid pro quos are preferred, e. g. cross licenses, products • Dormant IP portfolios are licensed for profit • Other arrangements have been developed, e. g. joint venturing, corporate partnering, co-marketing, co-promotion, strategic alliances, consortium licensing (Sematech) • No anti-trust enforcement Nine no-nos are history Positive anti-trust through legislation • Above all — win/win philosophy, attitude more prevalent

INNOVATION: A THREE-STEP PROCESS • one day an American firm announces a breakthrough invention; • next day the Russians claim they made the same discovery twenty years ago; and • on the third day the Japanese start exporting the new product.

KINDS OF PATENTS I. Utility Patents Design Patents Plant Patents II. Mechanical Patents Chemical Patents Electrical patents Biotech Patents Software Patents Business Method Patents III. Product Patents Composition Patents Use Patents Process Patents IV. Pioneer Patents Basic Patents Dominant Patents Improvement Patents Paper Patents Picture Patents Selection Patents Poor Man’s Patents Submarine Patents V. Petty Patents (Utility Models) Patents of Importation Patents of Confirmation

LICENSING OF PATENT APPLICATIONS 1) Truism: a pending application confers no right of exclusion — only issued patent do. 2) So how can one license an application that at law grants no right to exclude? If one can’t license and exact royalties after patent term — why before? 3) Very commonly done — grammatical, substantive error? 4) If error — business community lives with it very well. 5) License is merely a withholding of a right to exclude others. License is not grant of anything. 6) What’s rationale, rationalization, justification? a) § 261 makes patent personal property, so application in and of itself is species of property. Thus right to license application is inherent in lawful right to assign application. Strained! Better: b) Purported license = license of trade secret or c) Purported license = license of patent when issues or d) Both 7) “Licensing of patent applications is a hybrid animal which requires special treatment to avoid (potential problems. ” (David Hill)

IMPLIED LICENSE 1. 2. 3. 4. 5. Shopright — employer-employee relationship Via acquiescence of patent owner — sits on his/her rights — laches Business relationship — close cooperation on innovative project See Wang v. Mitsubishi, CAFC, 1997 Licensor-Licensee Relationship — under unlicensed but indispensable patent — e. g. dominant patent issued later to licensor or earlier-issued dominant patent acquired by licensor Seller-Buyer relationship under combination or method patent of seller who sells a component or article for use in the patented combo or method See Jacobson v. Cox, Dist. Ct. , Arizona

COMPULSORY LICENSES In Foreign Countries Compulsory License provisions universal Paris Convention — Art. 5 GATT TRIPS — Art. 31 (very restrictive) For non-working For dependent patent Rarely used In United States General Rule: No duty to use or license patented invention (§ 271(d)(4) Compulsory license notion = anathema in U. S. However, Forcing patentee to license = compulsory license Denying patentee injunctive relief = tantamount to compulsory license Examples: Infringement by Government Infringement by TVA Infringement via assistance under International Development Act Compulsory license provisions in — Atomic Energy Act Air Pollution Control Act Plant Variety Protection Act Bayh-Dole Act (march-in rights) As relief in Antitrust cases Injunction denied — Public Health & Safety, Unusual hardship on infringer without benefit to patentee

TYPES OF LICENSE TRANSACTIONS • Assignment – outright sale, transfer of title • Exclusive license – permission to one party only (licensee) • Sole (semi-exclusive) – permission to one other party (licensor and licensee) • Non-exclusive – permission to one or more parties (licensor and any number of licensees) • Covenant not to sue – nonassertion agreement

NON-EXCLUSIVE LICENSES • No statutory basis • Immunity from suit — covenant not to sue – I. e. merely waiver of right to sue for conduct which would constitute infringement and would be actionable, absent license • No affirmative rights go with it – e. g. re enforcement of licensed patent • No freedom from competition – if there is infringement, it is no legal injury

SPECTRUM OF LICENSING 1) Option 2) Option/License 3) Covenant not to sue Non-assertion agreement 4) License — Non-exclusive Immunity from suit 5) License — Sole, Semi-exclusive, 6) License — Exclusive 7) Assignment 8) Acquisition Co-exclusive

OPERATIVE LANGUAGE A. Assignment A sells, conveys, transfers and assigns to B all its right, title and interest in and to certain Patent Rights. B. License 1) A grants to B 2) a (non) exclusive license under certain Patent Rights 3) to make, have made, use, offer to sell, sell or import Licensed Products (or to practice Licensed Methods) 4) throughout the U. S. 5) for the duration of the Agreement.

THE ALL-IMPORTANT GRANT CLAUSE The most important clause in a license agreement. A typical basic grant clause might have the following five elements: 1) A grants (or agrees to grant or grants and agrees to grant) 2) a (non) exclusive (or sole) license under certain IP Rights 3) to make, have made, use, offer to sell, sell or import Licensed Products (or to practice Licensed Methods) 4) throughout the territory 5) for the duration of the Agreement. Do not use such modifiers as “indivisible, ” “irrevocable, ” “nontransferable” and “perpetual. ”

EXCLUSIVE LICENSE OR ASSIGNMENT? Not uncommonly, what is perceived by the businessman as an “exclusive license, ” is best negotiated into the form of a paten assignment perhaps with rights to reversions of title if royalties are not paid– this is because the exclusive license differs from assignments only in areas (like who sues infringers and has authority to compromise in settlement) which may be better born by the party actively in the business than by the passive transferor of the technology. Tom Arnold, “Basic Considerations in Licensing, ” p. 128

PROTECTION OF (EXCLUSIVE) LICENSOR 1. Lumpsum payment — paid up license 2. Minimum royalties 3. Termination power — outright • if a desired total not reached • if annual minimums not maintained 4. Conversion to non-exclusive license 5. “Best efforts“ clause • • dubious language variously interpreted very strictly or leniently better: reasonable diligence consistent with interests of business best: objective, quantitative criteria of performance

BETTER ALTERNATIVES FOR THE COMMON “BEST EFFORTS” CLAUSE A “best efforts” clause to the effect that ABC ‘shall exercise its best efforts to exploit the Licensed Products” is dubious language. Better: “reasonable diligence consistent with the interests of the business” Best: 1. Best Efforts shall mean those efforts which a reasonably prudent person knowledgeable of such matters would consider desirable, necessary or commercially reasonable to further the intentions of the Parties hereunder” 2. Objective, quantitative criteria of performance 3. Conversion from exclusive to non-exclusive status 4. Termination power if specific levels of performance or annual minimums are not maintained 5. Lumpsum up-front payment

BEST EFFORTS OBLIGATION Licensee shall exercise its best efforts to produce, sell and offer for sale Licensed Machines. “Best efforts” shall mean those efforts which are commercially reasonable to further the intentions of the Parties with respect to quality as well as quantity of the Licensed Machines produced. Production of 250 Licensed Machines per half year after March 1, 2001 of a quality that conforms with established industry standards, will satisfy Licensee’s best efforts obligation hereunder.

WAYS TO PROTECT LICENSEES FROM THIRD-PARTY DOMINANT PATENT RISKS 1)Hold-harmless clause with licensor — getting licensee another license — providing a non-infringing alternative or — defending an infringement suit (but not open-endedly) 2)Cost-sharing arrangement — if royalties have to be paid to third party — if infringement suit has to be defended 3)Renegotiation of royalty provision

A TROUBLE-FREE MFL CLAUSE A very important clause in non-exclusive licenses. Advisable 1. to stay away from vague phrases (such as, “other terms and conditions, ” 2. to include escape clauses or exceptions, e. g. settlements, 3. to give licensee the right to terminate and negotiate the license, if a subsequent licensee has been overly favored.

PATLEX LICENSE ARTICLE XII – MOST FAVORED LICENSEE If subsequent to the effective Date of this Agreement another manufacturer of lasers, laser systems, or Low or High Power Laser Tubes similarly situated to LICENSEE is granted a license by PATLEX which provides to said another manufacturer a combined royalty rate and royalty base materially more favorable to said another manufacturer with respect to any of the Licensed Patents than that provided herein to LICENSEE for lasers, laser systems and Low or High Power Laser Tubes sold or leased in the United States, then LICENSEE may, at its option, adopt the subsequent license in its entirety, mutatis mutandis, as of the effective date of such subsequent license. PATLEX shall notify LICENSEE of any such subsequent license and provide LICENSEE an opportunity to exercise the option provided herein.

ADDITIONAL CLAUSES NEEDING CLOSE ATTENTION Definitions — the second-most critical clause in licenses Confidentiality — crucial where trade secrets are involved Improvements — “grant-back” by licensee to licensor or “grant forward” by licensor to licensee where they continue their R&D, a narrow, precise definition, tied to the scope of the patent claims, in non-exclusive form Sublicensing rights — especially important in exclusive licenses for practical and legal reasons Termination — this third most important clause is a multipronged concept, each prong needs to be defined separately, a license never terminates over night, different rights and obligations of the parties continue

ROYALTIES Royalty-free Royalty-bearing Lump sum — single or installments Running royalties Fixed Sliding Increasing Decreasing Maximum (Cap) Minimum Combination of both Most common combination 1) Initial lump sum (10%) 2) Running royalty (on net sales) 3) Minimum yearly royalty Total royalty income depends on Royalty base Royalty rate Duration of agreement

ROYALTIES Non-exclusive Licenses “Industry Standards” “Folklore — Suspect as Royalty-rate Guide” Chemicals 1 -5% Electronics 1 -5% Computers 3 -5% Consumer Products 2% Pharmaceuticals 4 -15% For exclusive licenses 20 -50% premium Up to 300% premium in pharma field

ROYALTIES MOST IMPORTANT FACTORS a) the state of development of the subject technology (embryonic and untested v. tested and commercial), b) the strength of the IP rights (solid v. weak, ease to design around vel non), and c) the degree of exclusivity (exclusive v. non-exclusive). ----d) the amount of, and value added by, trade secrets “Trade secrets are a component of almost every technology license. . . (and) can increase the value of a license up to 3 to 10 times the value of the deal if no trade secrets are involved. ” (Melvin Jager).

ROYALTY-FREE LICENSES There is significant royalty-free licensing. Makes eminent business sens. There is indeed great virtue in royalty-free licensing in terms of good will and good relationships, bringing about increased sales of goods and supplies and hence larger market share. Examples. At one point in my career at CIBA-GEIGY Corp. (now Novartis), I prepared over 20 royalty-free non-exclusive licenses to carpet manufacturers under patents I had obtained in the U. S. and Canada on an important improvement in tufting carpets. CIBA-GEIGY was not in the business of manufacturing and selling carpets but dyestuffs. CIBA-GEIGY had no intention to practice this tufting method itself. Licensing was the best alternative. Rather than doing it for royalties, we did it for free with the expectation that this would induce grateful carpet manufacturers to buy more dyestuffs from CIBA-GEIGY. Carpet manufacturers were pleased to be licensed for free to practice an important new technique for tufting carpets.

ROYALTY-FREE LICENSES (2) A more recent example is the royalty-free licensing by Iridian Technologies of iris-scan patents. Iridian owns a broad patent and another two dozen patents on irisrecognition software, which is able to accurately identify people at airport security or automated teller machiens. They licensed these patents also on a royalty-free basis after deciding that the “upside of software sales was greater than the downside of collecting royalties. ” They won contracts with Schiphol Airport and the UAE government and expected other big government contracts. Iridian will “end up getting a lot of business” per US Today of August 15, 2005. This case also shows that giving away valuable patent rights for free can be a savvy business move.

ROYALTY-FREE LICENSES (3) In the field of licensing law and practice there are other instances of, or occasions for, granting free licenses. • Interference settlement agreements. • Grant-back provisions in license agreements often are royaltyfree. • Releases of patent rights to employees, where a corporation or university has no interest in the employee’s invention. • Hybrid patent/trade secret licenses with royalty based on the trade secrets. • Corporations owning patents that would be infringed by university research grant the university a royalty-free license. • In standard setting situations, assurances by patentees to license on royalty-free terms. The conclusion is inescapable that royalty-free licensing of valuable IP rights in preference to royalty-bearing licenses, is conducive to creating good will and establishing or cementing good relationships, with attendant increases in market share.

DUE DILIGENCE An investigation undertaken in the course of an IP transaction. The purpose of a due diligence investigation is to provide the data needed to analyze and assess the business and legal risks associated with the IP rights that are the subject of the transactions. Due diligence procedures may include, among other things: 1) 2) 3) 4) identification of all IPRs involved in the transaction, verification of ownership and inventorship of the IPRs, determination of the enforceability or strength of the IP assets, review and verification of all documentation associated with the IPRs, including registrations, licenses, security liens, file wrappers, and claims of infringement; and 5) interviews of those persons with knowledge of the subject IPRs.

NEGOTIATION TACTICS Prepare thoroughly • do research on other side • develop strategy • prepare draft agreement or outline Choose third or fourth choice candidate for first round Form a team Stage a dress rehearsal Go in with win/win approach — not “wimpy/wimpy” Assure comfort and convenience Take good notes Take up less controversial issues first Take up money matters at end • agreement clauses have economic weight Use silence in negotiations Volunteer to draft agreement

NEGOTIATION OF LICENSING AGREEMENTS A. Object — 1. Good deal for both sides: win-win B. Necessary pre-negotiation homework — the more the better 70% of negotiation is preparation 1. Licensor’s information a) about company b) product or process description c) proprietary position d) sales history of product e) materials, components and equipment required f) cost data g) licenses already granted h) other 2. Licensee’s information a) place in market 1. names and volume of competitors b) financial position c) physical plant 1. availability of space and capital for expansion d) ownership 1. other affiliations 2. other licenses e) estimated costs for new license program f) estimated future market g) annual sales volume for past few years for other products, related and nonrelated

NEGOTIATION OF LICENSING AGREEMENTS (continued) C. D. Pre-negotiation internal discussions. 1. Selecting the team 2. Who does what 3. Practice negotiation – dress rehearsal a) helps your people feel comfortable b) try to determine and understand other needs c) may discover your, or other’s, weak points The negotiation 1. With as high a level as possible 2. With knowledgeable people on both sides. 3. Convince other party of reasonableness of your position 4. Listen to, and analyze, other party’s position 5. Know what is important and what is not — what you can give and what you cannot 6. Be creative and flexible 7. Say enough, but not too much 8. Caucus as often as necessary a) some emphasize items agreed upon b) some emphasize items not agreed upon c) a above is better 9. At end of session, state current status and what is next 10. Volunteer to prepare first draft Homer O. Blair

INESCAPABLE UNCERTAINTY PRINCIPLE IN CONTRACT DRAFTING 1. Semantic Dilemma — undefined terms — terms incapable of definition — few terms universally understood to have a single meaning e. g. “public domain”, “line of business” if try to define, often substitute another uncertainty stiff definitions important 2. Human Frailty Imperfection of human intelligence and attentiveness, press of business — can be mitigated Can lead to three defects a. ) ambiguity — two possible meanings — — different from vagueness (imprecise boundaries) e. g. “residence, ” “period from June 15 to” can be eliminated — of different words — additional words b. ) excessive vagueness — e. g. “indivisible” c. ) unclear modifier — most common, most dangerous see p. 46 of Brunsvold

ADMINISTRATION OF LICENSING PROGRAM POST-SIGNING ISSUES Distribution of license agreement — “working copies” Cooperation with Accounting re royalty set up Continuing contacts with and monitoring, notifications of other party re – – – – Quality control (in trademark licenses) Royalty audits Information exchange and technical assistance Grantback and grantforwards MFL clauses Sublicenses Patent activities Patent markings Bankruptcies — M& A’s Renegotiation, revision Termination — Multipronged Breach of contract `Other follow-through

BASIC CONSIDERATIONS • • • Some threshold considerations, principles and rules to keep in mind for drafting technology license agreements. The only viable license agreement is one that results from a win/win approach and passes the “fairness test. ” A win/lose license agreement has no future. It is by far better to “open a relationship” rather than “close a deal, ” when concluding a technology license. Even a 500 -page agreement may not cover all possible contingencies. Technology license agreements covering intellectual property rights (IPRs), and more particularly patents and trade secrets, are unlike other general contracts. The laws relating to IPRs have special characteristics and peculiarities, which leads to many misconceptions. In technology licensing the “merchandise” involved in the transaction are IPRs and hence it is imperative that one understands the nature of the “merchandise. ” The IPRs, serving as the basis of the transaction, determine much of the substance of the license agreement. In drafting technology licenses, the grant clause is the most important one and hence requires special attention. It is formulaic and has five crucial elements. The definitions and termination clauses are the second and third most important clauses, respectively. The payment clause is the very last one to be negotiated and finalized, because most other operative clauses have economic weight and affect the size of the ultimate consideration.

BASIC CONSIDERATIONS (2) • • In royalty-rate setting, so-called industry standards are suspect as royalty-rate guides; instead such factors as the stage of development of the subject technology, the strength of the IPRs and the degree of exclusivity as well as many others among Tom Arnold’s “ 100 Factors Involved in Pricing the Technology License” are determinative. In drafting technology licenses and other IPR licenses, the trend is away from archaic formalistic legalese and the preferred format or sequence of clauses is as follows: preamble, background, definitions, grant of rights, royalties, payment of royalties, license restrictions, confidentiality, enforcement/defense, future IP, duty to use, term and termination, other miscellaneous provisions. Most technology licenses are hybrid agreements, covering both patents and trade secrets, because without collateral know-how patented technology often cannot be practiced. But because of the different characteristics of patents and trade secrets, especially as regards duration, there has to be a differentiation in the treatment of patents and trade secrets. Royalties have to be allocated separately to each, depending on their proportional value in the technology package and there has to be a corresponding reduction of the royalty rate if the patent expires, is declared invalid or the application does not issue, inasmuch as it is per se patent misuse to continue to exact royalty payments once patent rights cease or don’t materialize (Brulotte v. Thys, Supreme Court, 1964). Anent the question of what role lawyers should play in licensing negotiations, many business and licensing executives believe it is better to limit the lawyer’s role to cleaning up the contract language once the business terms have been settled.

LICENSING CASE HISTYORY CLOCK CALCULATOR PATENT Four-Step Project 1. 2. 3. Exhaustive infringement search and study Exhaustive validity search and study Design of comprehensive Licensing Strategy a) Patent ownership transferred to new subsidiary b) Narrow royalty base c) Low royalty rate d) Offer of paid-up licenses e) Agreements prepared for both paid-up and running royalty licenses 4. Implementation

LICENSING CASE HISTORY GOULD LASTER PATENTS CAST OF CHARACTERS 1. ) Gordon Gould Sole inventor as Columbia graduate student — Owns 20% of patent rights and has a 20% share of the royalties. 2. ) Richard I. Samuel Partner of Lerner, David, Samuel, et al — prosecuted Gould applications — became President and CEO of PATLEX which had acquired 80% ownership in Gould patent rights from REFAC, a New York City licensing outfit, initially retained by Gould/Lerner, David, Samuel, et al to exploit Gould patent rights. (REFAC receives 16% and PATLEX, 64% of royalty income. ) 3. ) Herbert Dwight, Jr. Entrepreneur and founder of Spectraphysics and its CEO till retirement in 1988. 4. ) Frank Borman Former Astronaut and Chairman of Eastern Airlines, became Board Chairman of PATLEX in 1988.

LICENSING CASE HISTORY GOULD LASER PATENTS THE PRINCIPAL PATENTS 1. ) USP 4, 053, 845 Optically Pumped Laser Amplifiers Filed 4/6/59 — issued 10/11/77 — expires 10/11/94 2. ) USP 4, 161, 436 Method of Energizing a Material Filed 4/6/59 — issued 7/17/79 — expires 7/17/96 3. ) USP 4, 704, 583 Gas Discharge Light Amplifier Filed 4/6/59 — issued 11/3/87 — expires 11/3/2004 4. ) USP 4, 746, 201 Brewster Angle Window Laser Device Filed 4/6/59 — issued 5/24/88 — expires 5/24/2005 (Canada — 907, 110 — ‘ 89)

LICENSING CASE HISTORY GOULD LASER PATENTS PATENT PROCUREMENT & LITIGATION Difficult Prosecution Multi-party Interferences Three Re-examinations Appeals from PTO to District Court and Federal Circuit Infringment Litigation Control Laser FL Quantronix CA General Photomics CA

LICENSING CASE HISTORY GOULD LASER PATENTS STANDARD PATLEX LICENSE 1. User License Grant: non-exclusive worldwide license under USP 4, 161, 436 on “Method of Energizing and Material” — immunity under all Gould patents. Royalty: 1) 2) 3) 4) 5) acquisition. 3% of purchase price of all lasers — for past infringement — within 60 days of effective date. 1% of purchase price on first, second and third anniversary of effective date. 6% of purchase price for future purchases unless purchased from licensed source. 8% for lasers which licensee hides. In case of acquisitions of companies over $20 M, royalties as per 1) — 4) within 60 days of

LICENSING CASE HISTORY GOULD LASER PATENTS STANDARD PATLEX LICENSE 2 Manufacturer License Grant: non-exclusive worldwide license under all Gould patents. Royalty: For Past Infringement: 1) 5% of net selling price upon signing under USP 4, 053, 845. 2) 13% under USP 4, 161, 436. 3) 5% under Can. Pat. 907, 110. . 4) 6% under USP 3, 562, 662, 3, 576, 500 and 3, 586, 998.

LICENSING CASE HISTORY GOULD LASER PATENTS STANDARD PATLEX LICENSE As Future Royalties: 1) 5% under USP 4, 053, 845 (Optically Pumped Lasers) 2) 2% under USP 4, 704, 583 (Gas Discharge Laser) or 3 -1/2% or 5% depending on occurrence of certain conditions. 3. ) 3 -1/2% under Application No. 869, 831 (Brewster’s Nagle Window) 4) 3% under USP 4, 161, 436 (User patent) 5) 5% under Can. patent 907, 100 6) 6% under USP 3, 576, 500 (Copper Vapor Laser) 7) O% under any other Gould patent. For multiple patents — highest rate. Other terms: complicated provisions with respect to the above patents as to royalty base. No royalty on governmental sales. Licensee’s customers won’t be sued.

LICENSING CASE HISTORY GOULD LASER PATENTS KEY PROVISIONS — CRUX OF THE AGREEMENTS Step-up royalty from 2% to 5% in 2 steps Triggers: 1) when one competitor licensed or sued up to 3 -1/2% 2) when both competitors licensed or sued up to 5%

LICENSING CASE HISTORY GOULD LASER PATENTS PATLEX/COHERENT LICENSE USA Sales Range Royalty Rate $ O — $12. 5 million 5. 0% $12. 5 million and above 4. 0% Foreign Sales Range Royalty Rate $ O — $7. 5 million 2. 0% $7. 5 million and above 1. 6% As long as Spectraphysics is neither licensed nor sued, royalty is only 3% of U. S. net sales and 1. 2% of foreign net sales. Annual cap of $125 K under Use Patent License. Contains MFL Clause.

LICENSING CASE HISTORY GOULD LASER PATENTS VOLUME BREAKPOINTS OR DESCENDING ROYALTY SCALE USA Sales Range Royalty Rate $ 0 -$15 million 5. 0% $15 -$20 million 3. 0% $20 -$25 million 1. 0% $25 million and above 0. 5% Foreign Sales Range Royalty Rate $ 0 -$ 5 million 2. 0% $ 5 -$10 million 1. 0% $10 -$15 milion 0. 5% $15 million and above 0. 25%

LICENSING CASE HISTORY GOULD LASER PATENTS This case history clearly illustrates the dynamic interplay of step-up royalty/MFL clauses and a descending royalty scheme with the former inducing the smaller players to sign up when the bigger competitors—here Coherent and Spectra. Physics– are holdouts and thus have an additional competitive edge by not paying any royalties. And the descending royalty schedules entice the holdouts to take out licenses, inasmuch as their total royalty exposure is significantly reduced, e. g. down to about 1. 7% in the case of Spectra-Physics